The realities of fundraising

Think twice before getting into actively selling to investors

If you are considering trying to raise funds from investors (angels or professional investors), you should consider the following:

There are 2 types of investors really:

- the ones who know you (friends and family), and

- the ones who do not
know you (angels, VCs, etc...)

Getting money from people you know will be the result of the history
they have with you. They will be able to trust you as an entrepreneur
and trust that if they like the plan you have you will be able to
execute on it. I call it "opportunistic fundraising" and this is always
worth considering this kind of investment money.

Talking to the other group is doing active selling, except that you are
selling to investors instead of selling to customers.
There are many issues related to selling to investors:
- Investors have no pressing need to buy. They have a limited amount of
money to spend, and you are just one among many presenting to them, so
while you could be the hot project, the next guy could be that too.
And time is on their side, because the more they wait, the more you
will need the money and the better the deal potentially.
This means your sales cycle is going to be very long, and while you are
spending time trying to sell to investors, you are not selling to
customers and therefore you are not helping the business itself.

- Investors are not customers, so the story you are building to please
them may not be the right story for the market. I see many
entrepreneurs try to fit their strategy within the perceived
expectation of investors, with buzz words, the hockey stick, the
minimum 50M revenue within a few years, and inflated funding
requirement to be able to get into the VC framework. So selling to
investors sometimes contributes to corrupting the initial plan, which
is a good way to get into failure.

- Ultimately, having sold to investors may feel good as it can be
perceived as a validation, except that this is not a validation from
the market, and therefore does not guarantee success at all. All it
does is make it more comfortable for everybody while waiting for more
customers.
But if the plan you have sold to investors does not work, you will be
help responsible for the failure, which mean adjusting the plan later
on will be costly to you as the entrepreneur, if not deadly.
More difficult than adjusting your plan when you are in charge...

So I believe the best way to raise money is to go to friends and
family, and then figure out how you can start generating cash from the
little you were able to get there.
The good news is that if you look at the top 500 companies of Inc
magazine (companies doing between 7x growth for 3 years and 30x growth
for 3 years), the average starting capital is 75k, and only 8% ever
raised more than 1M. So even with a little you still have a chance to
fit within that group of hot companies.
This clearly beats have one chance in a 100 to be picked by a VC, only
to be told then that you have one chance in 10 to really make it big.